Buying to Sell: A Theory of Buyouts
44 Pages Posted: 22 Mar 2010
Date Written: March 12, 2010
Private equity backed firms have more leverage, more intense compensation contracts, and higher productivity than comparable non-private equity backed firms. We develop a theory of buyouts in oligopolistic markets that ties these facts to an explicit focus on buying assets with the intent of selling them. Private equity backed firms are better governed and are more aggressive in restructuring compared to incumbents since their owners maximize a trade sale price. The equilibrium trade sale price increases in restructuring intensity not only by increasing the profit of the acquirer, but also by decreasing the profits of non-acquiring firms. Predictions on the exit mode and on when private equity firms can outbid incumbents in the market for corporate control are also derived.
Keywords: Acquisitions, Buyouts, Buy-to-sell, Buy-to-keep, Leveraged Buyouts, Private equity, Take-overs, Temporary ownership
JEL Classification: G24, G32, G34, L1, L2
Suggested Citation: Suggested Citation